On November 26, 2018, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation
[1] with Papua New Guinea.

In 2018 growth of the Papua New Guinea (PNG) economy was adversely affected
by a large earthquake, which temporarily halted production in much of the
resource sector. Although APEC activities and good agricultural harvests
have provided some offset, overall GDP growth for the year is estimated to
be close to zero, but recover to 3.8 percent in 2019 as resource output
returns to normal. Weak demand and improved agricultural supply have
continued to contribute to an easing of inflation to around 4½ percent. PNG
continues to face a shortage of foreign exchange, despite a large current
account surplus. Large resource export revenues are almost entirely offset
by resource project debt repayments and dividends. The shortage has led to
rationing of foreign exchange, which has dampened growth. International
reserves stood at $1.7 billion at end-2017, equivalent to 5 months of
imports.

The main macroeconomic challenges for the government are to finish putting
in place policies that will help promote economic stability, and to
strengthen its long-term development framework. In 2017-18, the new
government made important progress in narrowing the fiscal deficit, and
adopted a medium-term revenue strategy. But progress on fiscal
consolidation has stalled, and the debt-to-GDP ratio is well above the
medium-term target. The monetary authorities have begun to address the
foreign exchange problem by facilitating exchange rate adjustment,
increasing the supply of foreign exchange, and strengthening the monetary
framework.

Near-term risks to the outlook are roughly balanced. A weakening of global
growth could lower commodity export prices, dampening growth and making
fiscal adjustment more difficult, but reforms to exchange rate policy could
have a more favorable impact on growth than expected.

Over the medium term, risks are more to the upside owing to the likelihood
that new resource sector projects will begin to get underway.

Executive Directors observed that growth in 2018 has continued to be
sluggish, reflecting low commodity prices and the effects of a large
earthquake that disrupted oil, gas, and mineral exports. They took positive
note that economic growth is expected to be stronger in 2019. In this
context, Directors agreed that strengthening macroeconomic policies and
implementing structural reforms would help reduce risks and support
inclusive longer-term economic growth.

Directors welcomed the confirmation of the government’s long-term debt/GDP
target of 30 percent and the adoption of a zero non-resource primary
balance as a medium-term objective. The adoption of an expenditure rule
consistent with the revenue target would help reconcile the fiscal targets
and guide budget policy. Directors noted that the recent issuance of a
debut sovereign bond is a positive development, and welcomed the
authorities’ intention to use the funds to improve the domestic public debt
profile and help resolve foreign exchange shortages. Directors also
welcomed the progress in strengthening public financial management.

Directors encouraged the government to continue to strengthen its fiscal
framework, and noted that in the near term, additional fiscal consolidation
is needed to reduce the risk of debt distress. This could be achieved
through a combination of increases in revenue and reduction in spending,
particularly on the government wage bill and grants. In this connection,
Directors welcomed the government’s strong commitment to strengthen
domestic revenue mobilization through implementation of its Medium-Term
Revenue Strategy, the significant increase in tax revenue through efforts
to strengthen compliance, and tighter government payroll controls.

Directors agreed that the greater exchange rate flexibility that has been
pursued in recent months should be continued in order to support growth in
the non-resource sector. Eliminating the backlog of foreign exchange orders
and strengthening liquidity management and foreign exchange operations
would support the re-establishment of an interbank foreign exchange market.
Carefully monitoring the impact of foreign exchange measures on the
financial sector will be important.

Directors encouraged the authorities to seek better terms in negotiations
for new resource projects and to develop a framework for managing resource
revenues. The development of the non-resource sector should be fostered
through provision of public services and infrastructure and be taken into
account in revenue mobilization. Directors also supported the elimination
of corruption and strengthening of governance as an important part of Papua
New Guinea’s development strategy, and commended recent progress in this
area.

Directors welcomed improvements in macroeconomic statistics, but noted that
further progress is needed to improve data completeness, timeliness, and
accuracy, and supported provision of additional technical assistance in
this area.

Papua New Guinea: Selected Economic and
Financial Indicators, 2014-19

Nominal GDP (2016): US$21.1 billion 1/

Population (2016): 7.9 million

GDP per capita (2016): US$2,353

Quota: SDR 131.6 million (14th Review: SDR 263.2 million)

2014

2015

2016

2017

2018

2019

Est.

Est.

Proj.

(Percentage change)

Real sector

Real GDP growth

15.4

5.3

1.6

2.5

0.0

3.8

Resource 2/

69.2

39.0

6.3

4.3

-6.8

8.3

Non-resource

7.0

-3.1

-0.1

1.8

2.6

2.2

Agriculture, forestry and fishing (share)

17.8

18.4

18.5

18.2

18.7

18.6

Mining and quarrying (share)

9.1

7.7

8.0

8.0

7.6

7.7

Oil and gas extraction (share)

11.3

14.1

15.0

15.4

14.1

15.0

CPI (annual average)

5.2

6.0

6.7

5.4

4.8

4.7

CPI (end-period)

6.7

6.3

6.6

4.7

4.8

4.7

(In percent of GDP)

Central government operations

Revenue and grants

20.9

19.3

17.6

17.6

17.9

16.7

Of which
: Resource revenue

2.3

1.1

0.7

1.0

0.7

0.5

Expenditure and net lending

27.2

24.1

22.8

20.3

20.8

19.0

Net lending(+)/borrowing(-)

-6.3

-4.8

-5.2

-2.7

-2.9

-2.2

Non-resource net lending(+)/borrowing(-)

-6.3

-4.8

-5.2

-2.7

-2.9

-2.2

(Percentage change)

Money and credit (percentage change)

Domestic credit

12.8

23.5

15.9

-1.0

10.5

-7.6

Credit to the private sector

3.5

3.4

7.2

-3.6

7.0

3.1

Broad money

3.4

8.0

10.9

0.9

16.5

-10.5

Interest rate (182-day T-bills; period average)

5.3

7.1

7.4

7.1

7.0

8.1

(In billions of U.S. dollars)

Balance of payments

Exports, f.o.b.

8.8

7.8

8.7

9.7

9.6

10.5

Of which:
Resource sector

7.1

6.6

7.1

8.1

8.3

9.1

Imports, c.i.f.

-4.5

-2.7

-2.0

-2.5

-2.7

-3.2

Current account (including grants)

0.3

2.4

4.5

4.9

4.9

5.1

(In percent of GDP)

1.3

11.8

23.7

23.9

22.8

23.0

Gross official international reserves

2.3

1.9

1.7

1.7

2.2

1.8

(In months of goods and services imports)

5.9

6.0

4.4

4.9

5.6

4.4

(In percent of GDP)

Government debt

Government gross debt

27.1

32.3

37.8

37.5

36.8

36.2

External debt-to-GDP ratio (in percent) 3/

6.2

7.9

10.2

11.3

14.1

15.1

External debt-service ratio (percent of exports) 3/

1.1

1.1

1.3

1.4

1.8

2.5

Exchange rates

US$/kina (end-period)

0.3855

0.3325

0.3150

0.3060

…

…

NEER (2005=100, end-period)

114.2

116.4

104.2

101.0

…

…

REER (2005=100, end-period)

123.6

131.4

123.6

124.0

…

…

Terms of trade (2010=100, end-period)

97.4

102.0

93.4

85.0

87.0

84.8

Nominal GDP (in billions of kina)

56.8

57.1

59.6

65.5

70.8

75.2

Non-resource nominal GDP (in billions of kina)

45.2

44.7

45.9

50.2

55.4

58.1

Sources: Department of Treasury; Bank of Papua New Guinea;
and IMF staff estimates and projections.

1/ Based on period average exchange rate.

2/ Resource sector includes production of mineral,
petroleum, and gas and directly-related activities such as
mining and

quarrying, but excludes indirectly-related activities such
as transportation and construction.

3/ Public external debt includes external debt of the
central government, the central bank, and statutory
authorities.

[1]
Under Article IV of the IMF's Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country's economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.

[2]
At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country's authorities. An
explanation of any qualifiers used in summings up can be found
here:
http://www.imf.org/external/np/sec/misc/qualifiers.htm
.

IMF Communications Department

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